We often ask the question of whether to lease or buy when it comes to cars. For some, the thought of a brand new car every three years is enticing, but for others, owning their car just makes sense. The last few years have led to an interesting auto market. Supply is limited and prices are high, but the same pros and cons still exist. Join us as we look at both options and learn which may be the right choice for you.
Leasing
Leasing is a great way to get a car that is reliable, under warranty, and has the new car smell. When leasing you pick out your vehicle, negotiate the price and discounts, and determine your yearly mileage allotment. This decision is a big one and a reason many skip the lease because it can be hard to guess how many miles you put on a car in a year. If you go over the selected mileage you will be responsible for paying an additional amount. The average mileage for leases in between 10,000 and 12,000 miles a year, though additional options are available. If you are a road warrior, you might want to skip the lease.
Another perk is the option for a new car every three years. This is great if you’re into the latest things, or you have changing needs. A family with small children may be better suited for a minivan, but after a few years with no more strollers, the family may be a better fit for an SUV or crossover. Because drivers are starting a new lease when they turn in their old, there’s no need for trade-in discussions, or the hassle of trying to sell your previous vehicle.
The next great thing about leasing is the condition of the car and the warranty. Most leases last three years and vehicles remain under warranty, leaving the lessee to cover regular maintenance. Because you return the vehicle before the warranty is up, you will never have to deal with serious mechanical issues. Another perk is when the lease is over, drivers have the option to buy the vehicle for the agreed upon residual value. A nice option when used vehicles are hard to come by.
One thing people against leasing will tell you is that you never own your vehicle. You are in a cycle of paying money for a car that is not yours and you have no equity and no asset. Eventually you will pay more in lease payments than you would to buy a car outright. Another con is that you have to keep the car in pretty good condition or run the risk of additional charges at the end of your lease. And, as we mentioned before, if you go over on mileage, that can hurt too.
Buying
According to Tyson Jominy, vice president of data & analytics at J.D. Power, “Nowadays, a buyer in search of a new luxury vehicle at an affordable price is better served by a 72-month auto loan.” This is supported by the dwindling inventory and the rising prices. Manufacturers are offering fewer incentives for leasing which means higher monthly payments.
Buying a vehicle with a conventional car loan is pretty straightforward. You borrow money (check out 4Front’s options) and make monthly payments for a number of years. A portion of each payment is put toward paying interest on the loan and the rest is used to pay the principal. As you make payments, you build equity until the car is all yours. You can keep the car as long as you like and treat it as nicely—or poorly—as you want to. The only penalties for modification or abuse could be repair bills and a lower resale value down the road. But there are no limits as to what you can and can’t do, including how far you drive!
Since you own your car at the end of your loan term, you can do what you want with it. Sell it? Do it! Trade it in and use the value for down payment on a new vehicle. Why not? Or, keep it and drive it until you can’t anymore, then fix it, and drive it some more. The choice is yours! Of course, owning a car past it’s warranty period means that you are paying for more repairs, but on the upside, you’re not paying on a loan so it works itself out.
Here’s a hot personal finance tip: once you pay off your auto loan, keep making car payments to yourself. Stash the usual payment into a savings account and you will have funds if your car breaks down or you decide you want a new one! You’ve already budgeted for the money, so you won’t even miss it.
While there are a lot of pros to buying a car, there are a few cons. Depreciation. Just driving that car off the lot loses you money, and unless you pay cash, you are paying interest on your loan. As mentioned you are also on the hook for maintenance and any repairs needed after that warranty period. The older the vehicle gets, the less reliable it becomes, for some, that is a major downside.
So, whether leasing or buying is right for you, you should do you research, look around, and be prepared when you walk into a dealership. Having all your information is the first step in getting the best deal. Happy shopping!